Report from Paris
David R. Kotok
March 18, 2013
Several world travelers are sitting at lunch in Paris, immersed in speculation. Greek banks in Cyprus were ring-fenced. Cypriot banks were not. Why?
If Greek banks with branches in Cyprus are punished, the euro group has to offer more money to bail them out. So why magnify the loss by including the Greek banks’ branches in Cyprus? Next, think of the geography here. Cyprus is divided: half its people are Turkish and half are Greek. There is ancient enmity at work here. Why exacerbate that?
Now get to the issue of Turkey. Turkey has been baited about the European Union for decades. It is neither in nor out. Some premiers such as former French presidents say things like, “Someday they will qualify.”
Look at Turkey’s shared borders with countries like Syria, Iran, and Iraq. Think of what the world looks like today. Think of Turkey as a very strong growth emerging market.
If you had to handle a banking crisis involving substantial Russian deposits in the European Union and Eurozone and denominated in the euro, what construction would you use?
Now we are in the throes of this mess in Europe. No one knows how this will turn out. Add to that the prospect of Russian retaliation. Does it come in the form of higher energy prices? Does it come with taxation or imposition of fees on the electrical grid that runs through Eastern Europe? No one knows.
The decision to impose taxation and revise the formula in order to maintain parliamentary passage, thus enabling the Russians to pay the price, is fraught with risk.
We expect large bank runs, and not only from Cypriot banks. No one in their right mind would hold euro deposits in weaker banks or weaker countries. Cyprus is proof that national deposit guarantees are worthless in the present euro-system structure.
It is Paris and it is cold. Lunch and the conversation are exciting.
David R. Kotok, Chairman and Chief Investment Officer, Cumberland Investors
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